NEW YORK (Real Money) -- There are clear winners and losers in a rising interest-rate environment. Wednesday we discussed the financial sector and why it'll be among the winners (and why that's particularly true of the smaller regional banks). Today, let's acknowledge that certain sectors are likely to be losers -- and that rate-sensitive utility stocks top that list.
Call me a flip-flopper, but I'm exiting my long position in Southern Co. (SO). Just over a month ago, I recommended this name because I couldn't envision a scenario in which the Fed would raise rates in the near future. Since then, we've seen a disappointing first-quarter advance GDP figure of just 0.2% and a horrendous March non-farm payroll report that's been revised even lower to just 85,000 new jobs. Under these conditions, a Fed rate hike seems even less likely.
But while the Fed still doesn't appear close to raising rates, the market is already doing so, as yields on longer-term U.S. Treasuries have ballooned over the past two weeks. Yield-starved investors have had sparse choices over the past few years, and this forced many of them to into high-dividend investments such as utilities. Higher interest rates will provide investors with a variety of less-risky alternatives, causing money to flow out of the utilities sector.
Looking at Southern Co. now, the technical picture has changed. This stock has broken beneath a support level at $43.65 (black line) and closed beneath it for two consecutive days. This breakdown is occurring on high turnover; eight of the past 10 trading sessions for SO have seen above-average volume (shaded yellow). Also, the stock's MACD (moving average convergence divergence) indicator flashed a sell signal on May 8 (arrow).
Looking at the broader sector, the S&P Select Utilities SPDR (XLU) chart possesses many similar attributes, including a MACD sell signal (arrow) and a recent pickup in volume (shaded yellow). The only major difference between XLU and SO is that the former hasn't broken support (black line) just yet. It will likely follow the same path as SO; XLU seems to be living on borrowed time.
Like many others, I didn't see the spike in Treasury yields coming, but now that it's here it can't be ignored. We're at the beginning of the end of an era of historically low rates, one which has been exceedingly favorable to this sector. Under these circumstances, the decision to sell Southern Co. is an easy one.
Editor's Note: This article was originally published at 10 a.m. EDT on Real Money on May 14.